While the U.S. Supreme Court validated the use of mandatory, predispute arbitration agreements in employment dispute situations in a decision issued this spring, states have begun attacking arbitration of employment disputes involving sexual harassment claims. Are those state attacks valid?
There has been substantial legislative activity in the last year resulting from the #MeToo movement.
- The federal tax bill supported by the Trump administration contains a section preventing the deduction of a payout, attorneys’ fees, and costs if there is a confidentiality provision in an agreement settling a sexual harassment case.
- Several states have passed laws or introduced legislation to prevent use of confidentiality provisions in settlement agreements on sexual harassment claims.
- Some states have mandated training on sexual harassment issues for supervisors, and in one state for companies with an employee count as low as five.
- Another state has instituted mandated reporting to a state agency of sexual harassment settlements.
This trend is likely to continue.
The focus of this article is on one aspect of #MeToo driven reforms: limitations on mandated arbitration of sexual harassment claims contrary to the overwhelming weight of case law prohibiting restrictions on arbitration under the Federal Arbitration Act.
Recently, the Supreme Court of Kentucky outlawed mandatory arbitration agreements of employment claims based on a quarter century old law that an employee cannot be required to arbitrate or otherwise diminish a claim as a condition of employment.
In 2018, Maryland enacted a statute, signed by Republican Governor Hogan, to prevent employees with sexual harassment claims from being required to arbitrate them. This is in contrast to California where Democratic Governor Brown vetoed a law with a similar goal because of his fear that states may not encumber rights under the Federal Arbitration Act.
Dealers understand well the law on encumbering rights under the Federal Arbitration Act. When franchisors were threatening mandated arbitration of franchise disputes (and Saturn did so), states looked at ways around the FAA, but were stymied by overwhelming case law that state restrictions on FAA rights are impermissible. Dealers instead went to Congress to obtain an amendment to the Federal Arbitration Act which prohibited mandated arbitration in agreements between motor vehicle franchisors and their franchisees. State laws that infringe on rights under the FAA may be constitutionally infirm. Congress passed the FAA. It is the law of the land. State attempts to limit FAA rights are likely preempted under the Supremacy Clause of the U.S. Constitution.
If you are in a state which is seeking to outlaw arbitration of sexual harassment claims by employees, take steps.
· Your employment arbitration agreement must clarify that it is governed by the Federal Arbitration Act. State action to ban or limit arbitration of sexual arbitration claims in employment situations will prevent enforcement of arbitration under state law.
· Review your arbitration agreement to be sure that it provides for mandated arbitration “except as prohibited by law” so the whole agreement is not ruled illegal by a state court judge. If a sexual harassment claim occurs where a state statute or decision prevents arbitration, the phrase may not protect you from a state court ruling preventing mandated arbitration, but it may allow the agreement to survive regarding other types of claims.
· Understand that a statute or decision preventing arbitration of sexual harassment claims can be challenged judicially. The case law preventing state restrictions on arbitration proceedings under the Federal Arbitration Act is very strong. If an employee sues, you have the option to seek an order mandating arbitration. A judge may well agree with you that the state law is unconstitutional. If not, you will have a strong appeal.
· Even if the state in which you do business has not taken action regarding arbitration of sexual harassment claims, but it has mandated other requirements such as prohibition of confidentiality agreements in settlements, reports about settlements, and similar provisions on sexual harassment claims, the requirements may reach beyond sexual harassment claims. You should have your employment arbitration agreement reviewed so it does not contain terms that will lead to it being ruled invalid.